There are significant tax traps when selling land for development or getting involved in the development itself. Planning ahead and taking professional tax advice could save time, money and stress.
Laura Wylie, senior tax manager at farm accountant Old Mill, said the key to any land development sales was understanding the implications early in the process.
“Every situation is different and could require things like restructuring of land ownership to avoid tax pitfalls,” she warned.
Capital gains tax
One of the first areas that landowners need to be aware of is the rules around capital gains tax (CGT).
Sales of bare development land by sole traders and business partners normally incur a CGT liability at 10% on gains up to the higher-rate income tax threshold of £50,271 and 20% thereafter.
However, where housing has already been built, the higher CGT rates for residential property apply (18% for lower-rate taxpayers and 28% for higher rates).
If the land is held by a company, any gains are normally subject to corporation tax – at present this is 19% but come 2023 the rate will increase to 25%.
However, if a landowner sells a dwelling which has been their main residence throughout ownership, there could be scope to claim private residence relief to reduce the amount of gain on which CGT is payable, potentially eliminating any CGT burden.
Landowners who choose to build property themselves, rather than sell it to a developer to carry out the build, should be aware that they could lose rollover relief (RR) by doing so.
“Landowners looking to build property rather than sell bare land to developers are potentially going to change the nature of the disposal from capital to income (as they may be seen as a property developer),” said Mrs Wylie.
“In this case, be wary of the higher 45% income tax and there won’t be business asset disposal relief (BADR) or rollover relief available.”
BADR (previously known as entrepreneurs’ relief) means less CGT may need to be paid when selling all or part of a business.
It means that all gains on qualifying assets are taxed at 10%. To qualify, sole traders, partnerships and businesses must have owned the asset for at least two years.
RR means that proceeds from the sale can be reinvested into new assets, delaying the CGT bill until the new assets are sold.
To qualify, new assets need to be bought within three years of selling the old ones, the business must be trading at the point of both sale and purchase, and both assets must be used in a trading business.
Development land may not always be sold within a landowner’s lifetime, which raises issues with inheritance tax reliefs.
When it comes to farmland and property, agricultural property relief will only apply to the agricultural value of land. All value above this may be exposed to inheritance tax at 40%, unless business property relief applies.
Therefore, gifting land before death could be an option to maximise the availability of these reliefs.
“It’s also worth being mindful of how long any option or promotion agreement lasts – as no one wants to be unable to do anything else on their land for 20 years,” said Mrs Wylie.
Other considerations include stamp duty land tax, which although a cost to the purchaser, will likely filter down to the landowner in a reduced sale price, so it is important to get an accountant involved with the heads of terms and discussions at an early stage.
Such discussions can also address issues such as whether it would be worth taking steps to allow for the VAT levied on planning application professional fees to be claimed back.
“An accountant can highlight such tax liabilities and help with decision-making to best benefit the landowner and their situation,” she said.